Rate Decisions Bury Currencies

Central bank meetings are creating more pain than gain for currencies this week. The Australian dollar shot higher immediately after the Reserve Bank’s monetary policy announcement but U-turned to end the day sharply lower against the greenback. It was one of the currencies hit the hardest by demand for U.S. dollars. Investors sold the Canadian dollar aggressively into tomorrow’s Bank of Canada monetary policy announcement, and the euro is struggling ahead of European Central Bank’s meeting.


The RBA, BoC and ECB meetings are some of this week’s most important event risks. Over the past few months, central banks have grown increasingly distanced in their policy directions. Canada was among the first to taper, but tomorrow, the BoC is widely expected to leave policy unchanged. With an unexpected contraction in GDP growth in the second quarter and expectations for negative growth in July as well, there’s little need to rush additional tapering. While inflation is hot, the Federal Reserve delayed a taper announcement in August, the Delta variant is slowing global growth and, most importantly, we are weeks away from Canada’s federal election on Sept. 20. The election is much closer than Prime Minister Justin Trudeau anticipated when he called the snap vote back in August. And the BoC will be remiss to add any weight to either side’s arguments. USD/CAD soared ahead of the rate decision on expectations of a relatively neutral central bank that will balance inflation concerns with virus worries. 


Lockdowns in Australia did not push the Reserve Bank to reverse its taper plans last night. The Australian dollar shot higher after the RBA announced it would proceed with its plans to reduce asset purchases this month. Investors were skeptical of the central bank’s rosy outlook, however. The RBA described the economic disruption of lockdowns as “only temporary” and will “delay, not derail the recovery.” With the central bank not expecting the economy to return to its pre-Delta path until the second half of next year, the sell-off in the Australian dollar reflects the market’s view that it will remain one of the most dovish central banks.


The European Central Bank meets Thursday, so we’ll touch on the ECB tomorrow. In the meantime, Eurozone economic data was mixed, with stronger German industrial production offset by weaker investor confidence. The expectations component of Germany’s ZEW survey dropped for the fourth month in a row to its lowest level since the pandemic began. 


Investors drove the U.S. dollar higher against all of the major currencies. Although Friday’s non-farm payrolls report was weaker than expected, the rise in Treasury yields since then and the decline in stocks today suggest investors don’t see weak NFP as a reason for the Fed to forgo releasing taper plans this month. With only three policy meetings before the end of the year, market participants expect the Fed to look past the stall in leisure and hospitality hiring. The Beige Book report is due for release tomorrow along with speeches from a number of Fed officials.


Sterling was driven lower by U.S. dollar weakness and concerns about Prime Minister Boris Johnson’s plans to boost the country’s social-care system. This morning Johnson laid out plans to raise taxes by 1.25% to pay for health care and social reforms – higher taxes always triggers more concerns than relief. U.K. house prices also rose at a slower pace, according to Halifax, the U.K.’s largest mortgage lender.

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